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Download 2010 tax forms 2. Download 2010 tax forms   Electing the Section 179 Deduction Table of Contents Introduction Useful Items - You may want to see: What Property Qualifies?Eligible Property Property Acquired for Business Use Property Acquired by Purchase What Property Does Not Qualify?Land and Improvements Excepted Property How Much Can You Deduct?Dollar Limits Business Income Limit Partnerships and Partners S Corporations Other Corporations How Do You Elect the Deduction? When Must You Recapture the Deduction? Introduction You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. Download 2010 tax forms This is the section 179 deduction. Download 2010 tax forms You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions. Download 2010 tax forms Estates and trusts cannot elect the section 179 deduction. Download 2010 tax forms This chapter explains what property does and does not qualify for the section 179 deduction, what limits apply to the deduction (including special rules for partnerships and corporations), and how to elect it. Download 2010 tax forms It also explains when and how to recapture the deduction. Download 2010 tax forms Useful Items - You may want to see: Publication 537 Installment Sales 544 Sales and Other Dispositions of Assets 954 Tax Incentives for Distressed Communities Form (and Instructions) 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 6 for information about getting publications and forms. Download 2010 tax forms What Property Qualifies? To qualify for the section 179 deduction, your property must meet all the following requirements. Download 2010 tax forms It must be eligible property. Download 2010 tax forms It must be acquired for business use. Download 2010 tax forms It must have been acquired by purchase. Download 2010 tax forms It must not be property described later under What Property Does Not Qualify . Download 2010 tax forms The following discussions provide information about these requirements and exceptions. Download 2010 tax forms Eligible Property To qualify for the section 179 deduction, your property must be one of the following types of depreciable property. Download 2010 tax forms Tangible personal property. Download 2010 tax forms Other tangible property (except buildings and their structural components) used as: An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services, A research facility used in connection with any of the activities in (a) above, or A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities. Download 2010 tax forms Single purpose agricultural (livestock) or horticultural structures. Download 2010 tax forms See chapter 7 of Publication 225 for definitions and information regarding the use requirements that apply to these structures. Download 2010 tax forms Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. Download 2010 tax forms Off-the-shelf computer software. Download 2010 tax forms Qualified real property (described below). Download 2010 tax forms Tangible personal property. Download 2010 tax forms   Tangible personal property is any tangible property that is not real property. Download 2010 tax forms It includes the following property. Download 2010 tax forms Machinery and equipment. Download 2010 tax forms Property contained in or attached to a building (other than structural components), such as refrigerators, grocery store counters, office equipment, printing presses, testing equipment, and signs. Download 2010 tax forms Gasoline storage tanks and pumps at retail service stations. Download 2010 tax forms Livestock, including horses, cattle, hogs, sheep, goats, and mink and other furbearing animals. Download 2010 tax forms   The treatment of property as tangible personal property for the section 179 deduction is not controlled by its treatment under local law. Download 2010 tax forms For example, property may not be tangible personal property for the deduction even if treated so under local law, and some property (such as fixtures) may be tangible personal property for the deduction even if treated as real property under local law. Download 2010 tax forms Off-the-shelf computer software. Download 2010 tax forms   Off-the-shelf computer software placed in service during the tax year is qualifying property for purposes of the section 179 deduction. Download 2010 tax forms This is computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. Download 2010 tax forms It includes any program designed to cause a computer to perform a desired function. Download 2010 tax forms However, a database or similar item is not considered computer software unless it is in the public domain and is incidental to the operation of otherwise qualifying software. Download 2010 tax forms Qualified real property. Download 2010 tax forms   You can elect to treat certain qualified real property you placed in service as section 179 property for tax years beginning in 2013. Download 2010 tax forms If this election is made, the term “section 179 property” will include any qualified real property that is: Qualified leasehold improvement property, Qualified restaurant property, or Qualified retail improvement property. Download 2010 tax forms The maximum section 179 expense deduction that can be elected for qualified section 179 real property is $250,000 of the maximum section 179 deduction of $500,000 in 2013. Download 2010 tax forms For more information, see Special rules for qualified section 179 real property, later. Download 2010 tax forms Also, see Election for certain qualified section 179 real property, later, for information on how to make this election. Download 2010 tax forms Qualified leasehold improvement property. Download 2010 tax forms   Generally, this is any improvement to an interior part of a building (placed in service before January 1, 2014) that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met. Download 2010 tax forms   In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor’s death or in any of the following types of transactions. Download 2010 tax forms A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or re-acquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor’s or distributor’s basis in the property. Download 2010 tax forms Examples include the following. Download 2010 tax forms A complete liquidation of a subsidiary. Download 2010 tax forms A transfer to a corporation controlled by the transferor. Download 2010 tax forms An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. Download 2010 tax forms Qualified restaurant property. Download 2010 tax forms   Qualified restaurant property is any section 1250 property that is a building or an improvement to a building placed in service after December 31, 2008, and before January 1, 2014. Download 2010 tax forms Also, more than 50% of the building’s square footage must be devoted to preparation of meals and seating for on-premise consumption of prepared meals. Download 2010 tax forms Qualified retail improvement property. Download 2010 tax forms   Generally, this is any improvement (placed in service after December 31, 2008, and before January 1, 2014) to an interior portion of nonresidential real property if it meets the following requirements. Download 2010 tax forms The portion is open to the general public and is used in the retail trade or business of selling tangible property to the general public. Download 2010 tax forms The improvement is placed in service more than 3 years after the date the building was first placed in service. Download 2010 tax forms The expenses are not for the enlargement of the building, any elevator or escalator, any structural components benefiting a common area, or the internal structural framework of the building. Download 2010 tax forms In addition, an improvement made by the lessor does not qualify as qualified retail improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor’s death or in any of the following types of transactions. Download 2010 tax forms A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or re-acquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor’s or distributor’s basis in the property. Download 2010 tax forms Examples include the following. Download 2010 tax forms A complete liquidation of a subsidiary. Download 2010 tax forms A transfer to a corporation controlled by the transferor. Download 2010 tax forms An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. Download 2010 tax forms Property Acquired for Business Use To qualify for the section 179 deduction, your property must have been acquired for use in your trade or business. Download 2010 tax forms Property you acquire only for the production of income, such as investment property, rental property (if renting property is not your trade or business), and property that produces royalties, does not qualify. Download 2010 tax forms Partial business use. Download 2010 tax forms   When you use property for both business and nonbusiness purposes, you can elect the section 179 deduction only if you use the property more than 50% for business in the year you place it in service. Download 2010 tax forms If you use the property more than 50% for business, multiply the cost of the property by the percentage of business use. Download 2010 tax forms Use the resulting business cost to figure your section 179 deduction. Download 2010 tax forms Example. Download 2010 tax forms May Oak bought and placed in service an item of section 179 property costing $11,000. Download 2010 tax forms She used the property 80% for her business and 20% for personal purposes. Download 2010 tax forms The business part of the cost of the property is $8,800 (80% × $11,000). Download 2010 tax forms Property Acquired by Purchase To qualify for the section 179 deduction, your property must have been acquired by purchase. Download 2010 tax forms For example, property acquired by gift or inheritance does not qualify. Download 2010 tax forms Property is not considered acquired by purchase in the following situations. Download 2010 tax forms It is acquired by one component member of a controlled group from another component member of the same group. Download 2010 tax forms Its basis is determined either— In whole or in part by its adjusted basis in the hands of the person from whom it was acquired, or Under the stepped-up basis rules for property acquired from a decedent. Download 2010 tax forms It is acquired from a related person. Download 2010 tax forms Related persons. Download 2010 tax forms   Related persons are described under Related persons earlier. Download 2010 tax forms However, to determine whether property qualifies for the section 179 deduction, treat as an individual's family only his or her spouse, ancestors, and lineal descendants and substitute "50%" for "10%" each place it appears. Download 2010 tax forms Example. Download 2010 tax forms Ken Larch is a tailor. Download 2010 tax forms He bought two industrial sewing machines from his father. Download 2010 tax forms He placed both machines in service in the same year he bought them. Download 2010 tax forms They do not qualify as section 179 property because Ken and his father are related persons. Download 2010 tax forms He cannot claim a section 179 deduction for the cost of these machines. Download 2010 tax forms What Property Does Not Qualify? Certain property does not qualify for the section 179 deduction. Download 2010 tax forms This includes the following. Download 2010 tax forms Land and Improvements Land and land improvements do not qualify as section 179 property. Download 2010 tax forms Land improvements include swimming pools, paved parking areas, wharves, docks, bridges, and fences. Download 2010 tax forms Excepted Property Even if the requirements explained earlier under What Property Qualifies are met, you cannot elect the section 179 deduction for the following property. Download 2010 tax forms Certain property you lease to others (if you are a noncorporate lessor). Download 2010 tax forms Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. Download 2010 tax forms Air conditioning or heating units. Download 2010 tax forms Property used predominantly outside the United States, except property described in section 168(g)(4) of the Internal Revenue Code. Download 2010 tax forms Property used by certain tax-exempt organizations, except property used in connection with the production of income subject to the tax on unrelated trade or business income. Download 2010 tax forms Property used by governmental units or foreign persons or entities, except property used under a lease with a term of less than 6 months. Download 2010 tax forms Leased property. Download 2010 tax forms   Generally, you cannot claim a section 179 deduction based on the cost of property you lease to someone else. Download 2010 tax forms This rule does not apply to corporations. Download 2010 tax forms However, you can claim a section 179 deduction for the cost of the following property. Download 2010 tax forms Property you manufacture or produce and lease to others. Download 2010 tax forms Property you purchase and lease to others if both the following tests are met. Download 2010 tax forms The term of the lease (including options to renew) is less than 50% of the property's class life. Download 2010 tax forms For the first 12 months after the property is transferred to the lessee, the total business deductions you are allowed on the property (other than rents and reimbursed amounts) are more than 15% of the rental income from the property. Download 2010 tax forms Property used for lodging. Download 2010 tax forms   Generally, you cannot claim a section 179 deduction for property used predominantly to furnish lodging or in connection with the furnishing of lodging. Download 2010 tax forms However, this does not apply to the following types of property. Download 2010 tax forms Nonlodging commercial facilities that are available to those not using the lodging facilities on the same basis as they are available to those using the lodging facilities. Download 2010 tax forms Property used by a hotel or motel in connection with the trade or business of furnishing lodging where the predominant portion of the accommodations is used by transients. Download 2010 tax forms Any certified historic structure to the extent its basis is due to qualified rehabilitation expenditures. Download 2010 tax forms Any energy property. Download 2010 tax forms Energy property. Download 2010 tax forms   Energy property is property that meets the following requirements. Download 2010 tax forms It is one of the following types of property. Download 2010 tax forms Equipment that uses solar energy to generate electricity, to heat or cool a structure, to provide hot water for use in a structure, or to provide solar process heat, except for equipment used to generate energy to heat a swimming pool. Download 2010 tax forms Equipment placed in service after December 31, 2005, and before January 1, 2017, that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight. Download 2010 tax forms Equipment used to produce, distribute, or use energy derived from a geothermal deposit. Download 2010 tax forms For electricity generated by geothermal power, this includes equipment up to (but not including) the electrical transmission stage. Download 2010 tax forms Qualified fuel cell property or qualified microturbine property placed in service after December 31, 2005, and before January 1, 2017. Download 2010 tax forms The construction, reconstruction, or erection of the property must be completed by you. Download 2010 tax forms For property you acquire, the original use of the property must begin with you. Download 2010 tax forms The property must meet the performance and quality standards, if any, prescribed by Income Tax Regulations in effect at the time you get the property. Download 2010 tax forms   For periods before February 14, 2008, energy property does not include any property that is public utility property as defined by section 46(f)(5) of the Internal Revenue Code (as in effect on November 4, 1990). Download 2010 tax forms How Much Can You Deduct? Your section 179 deduction is generally the cost of the qualifying property. Download 2010 tax forms However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. Download 2010 tax forms These limits apply to each taxpayer, not to each business. Download 2010 tax forms However, see Married Individuals under Dollar Limits , later. Download 2010 tax forms For a passenger automobile, the total section 179 deduction and depreciation deduction are limited. Download 2010 tax forms See Do the Passenger Automobile Limits Apply in chapter 5 . Download 2010 tax forms If you deduct only part of the cost of qualifying property as a section 179 deduction, you can generally depreciate the cost you do not deduct. Download 2010 tax forms Trade-in of other property. Download 2010 tax forms   If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 deduction includes only the cash you paid. Download 2010 tax forms Example. Download 2010 tax forms Silver Leaf, a retail bakery, traded two ovens having a total adjusted basis of $680 for a new oven costing $1,320. Download 2010 tax forms They received an $800 trade-in allowance for the old ovens and paid $520 in cash for the new oven. Download 2010 tax forms The bakery also traded a used van with an adjusted basis of $4,500 for a new van costing $9,000. Download 2010 tax forms They received a $4,800 trade-in allowance on the used van and paid $4,200 in cash for the new van. Download 2010 tax forms Only the portion of the new property's basis paid by cash qualifies for the section 179 deduction. Download 2010 tax forms Therefore, Silver Leaf's qualifying costs for the section 179 deduction are $4,720 ($520 + $4,200). Download 2010 tax forms Dollar Limits The total amount you can elect to deduct under section 179 for most property placed in service in 2013 generally cannot be more than $500,000. Download 2010 tax forms If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 deduction among the items in any way, as long as the total deduction is not more than $500,000. Download 2010 tax forms You do not have to claim the full $500,000. Download 2010 tax forms Qualified real property (described earlier) that you elected to treat as section 179 real property is limited to $250,000 of the maximum deduction of $500,000 for 2013. Download 2010 tax forms The amount you can elect to deduct is not affected if you place qualifying property in service in a short tax year or if you place qualifying property in service for only a part of a 12-month tax year. Download 2010 tax forms After you apply the dollar limit to determine a tentative deduction, you must apply the business income limit (described later) to determine your actual section 179 deduction. Download 2010 tax forms Example. Download 2010 tax forms In 2013, you bought and placed in service $500,000 in machinery and a $25,000 circular saw for your business. Download 2010 tax forms You elect to deduct $475,000 for the machinery and the entire $25,000 for the saw, a total of $500,000. Download 2010 tax forms This is the maximum amount you can deduct. Download 2010 tax forms Your $25,000 deduction for the saw completely recovered its cost. Download 2010 tax forms Your basis for depreciation is zero. Download 2010 tax forms The basis for depreciation of your machinery is $25,000. Download 2010 tax forms You figure this by subtracting your $475,000 section 179 deduction for the machinery from the $500,000 cost of the machinery. Download 2010 tax forms Situations affecting dollar limit. Download 2010 tax forms   Under certain circumstances, the general dollar limits on the section 179 deduction may be reduced or increased or there may be additional dollar limits. Download 2010 tax forms The general dollar limit is affected by any of the following situations. Download 2010 tax forms The cost of your section 179 property placed in service exceeds $2,000,000. Download 2010 tax forms Your business is an enterprise zone business. Download 2010 tax forms You placed in service a sport utility or certain other vehicles. Download 2010 tax forms You are married filing a joint or separate return. Download 2010 tax forms Costs exceeding $2,000,000 If the cost of your qualifying section 179 property placed in service in a year is more than $2,000,000, you generally must reduce the dollar limit (but not below zero) by the amount of cost over $2,000,000. Download 2010 tax forms If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 deduction. Download 2010 tax forms Example. Download 2010 tax forms In 2013, Jane Ash placed in service machinery costing $2,100,000. Download 2010 tax forms This cost is $100,000 more than $2,000,000, so she must reduce her dollar limit to $400,000 ($500,000 − $100,000). Download 2010 tax forms Enterprise Zone Businesses An increased section 179 deduction is available to enterprise zone businesses for qualified zone property placed in service during the tax year, in an empowerment zone. Download 2010 tax forms For more information including the definitions of “enterprise zone business” and “qualified zone property,” see sections 1397A, 1397C, and 1397D of the Internal Revenue Code. Download 2010 tax forms The dollar limit on the section 179 deduction is increased by the smaller of: $35,000, or The cost of section 179 property that is also qualified zone property placed in service before January 1, 2014 (including such property placed in service by your spouse, even if you are filing a separate return). Download 2010 tax forms Note. Download 2010 tax forms   You take into account only 50% (instead of 100%) of the cost of qualified zone property placed in service in a year when figuring the reduced dollar limit for costs exceeding $2,000,000 (explained earlier). Download 2010 tax forms Sport Utility and Certain Other Vehicles You cannot elect to expense more than $25,000 of the cost of any heavy sport utility vehicle (SUV) and certain other vehicles placed in service during the tax year. Download 2010 tax forms This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways, that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. Download 2010 tax forms However, the $25,000 limit does not apply to any vehicle: Designed to seat more than nine passengers behind the driver's seat, Equipped with a cargo area (either open or enclosed by a cap) of at least six feet in interior length that is not readily accessible from the passenger compartment, or That has an integral enclosure fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield. Download 2010 tax forms Married Individuals If you are married, how you figure your section 179 deduction depends on whether you file jointly or separately. Download 2010 tax forms If you file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. Download 2010 tax forms If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for costs over $2,000,000. Download 2010 tax forms You must allocate the dollar limit (after any reduction) between you equally, unless you both elect a different allocation. Download 2010 tax forms If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. Download 2010 tax forms Example. Download 2010 tax forms Jack Elm is married. Download 2010 tax forms He and his wife file separate returns. Download 2010 tax forms Jack bought and placed in service $2,000,000 of qualified farm machinery in 2013. Download 2010 tax forms His wife has her own business, and she bought and placed in service $30,000 of qualified business equipment. Download 2010 tax forms Their combined dollar limit is $470,000. Download 2010 tax forms This is because they must figure the limit as if they were one taxpayer. Download 2010 tax forms They reduce the $500,000 dollar limit by the $30,000 excess of their costs over $2,000,000. Download 2010 tax forms They elect to allocate the $470,000 dollar limit as follows. Download 2010 tax forms $446,500 ($470,000 x 95%) to Mr. Download 2010 tax forms Elm's machinery. Download 2010 tax forms $23,500 ($470,000 x 5%) to Mrs. Download 2010 tax forms Elm's equipment. Download 2010 tax forms If they did not make an election to allocate their costs in this way, they would have to allocate $235,000 ($470,000 × 50%) to each of them. Download 2010 tax forms Joint return after filing separate returns. Download 2010 tax forms   If you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your return, the dollar limit on the joint return is the lesser of the following amounts. Download 2010 tax forms The dollar limit (after reduction for any cost of section 179 property over $2,000,000). Download 2010 tax forms The total cost of section 179 property you and your spouse elected to expense on your separate returns. Download 2010 tax forms Example. Download 2010 tax forms The facts are the same as in the previous example except that Jack elected to deduct $30,000 of the cost of section 179 property on his separate return and his wife elected to deduct $2,000. Download 2010 tax forms After the due date of their returns, they file a joint return. Download 2010 tax forms Their dollar limit for the section 179 deduction is $32,000. Download 2010 tax forms This is the lesser of the following amounts. Download 2010 tax forms $470,000—The dollar limit less the cost of section 179 property over $2,000,000. Download 2010 tax forms $32,000—The total they elected to expense on their separate returns. Download 2010 tax forms Business Income Limit The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. Download 2010 tax forms Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business. Download 2010 tax forms Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. Download 2010 tax forms Special rules apply to a 2013 deduction of qualified section 179 real property that is disallowed because of the business income limit. Download 2010 tax forms See Special rules for qualified section 179 property under Carryover of disallowed deduction, later. Download 2010 tax forms Taxable income. Download 2010 tax forms   In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. Download 2010 tax forms Net income or loss from a trade or business includes the following items. Download 2010 tax forms Section 1231 gains (or losses). Download 2010 tax forms Interest from working capital of your trade or business. Download 2010 tax forms Wages, salaries, tips, or other pay earned as an employee. Download 2010 tax forms For information about section 1231 gains and losses, see chapter 3 in Publication 544. Download 2010 tax forms   In addition, figure taxable income without regard to any of the following. Download 2010 tax forms The section 179 deduction. Download 2010 tax forms The self-employment tax deduction. Download 2010 tax forms Any net operating loss carryback or carryforward. Download 2010 tax forms Any unreimbursed employee business expenses. Download 2010 tax forms Two different taxable income limits. Download 2010 tax forms   In addition to the business income limit for your section 179 deduction, you may have a taxable income limit for some other deduction. Download 2010 tax forms You may have to figure the limit for this other deduction taking into account the section 179 deduction. Download 2010 tax forms If so, complete the following steps. Download 2010 tax forms Step Action 1 Figure taxable income without the section 179 deduction or the other deduction. Download 2010 tax forms 2 Figure a hypothetical section 179 deduction using the taxable income figured in Step 1. Download 2010 tax forms 3 Subtract the hypothetical section 179 deduction figured in Step 2 from the taxable income figured in Step 1. Download 2010 tax forms 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. Download 2010 tax forms 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in Step 1. Download 2010 tax forms 6 Figure your actual section 179 deduction using the taxable income figured in Step 5. Download 2010 tax forms 7 Subtract your actual section 179 deduction figured in Step 6 from the taxable income figured in Step 1. Download 2010 tax forms 8 Figure your actual other deduction using the taxable income figured in Step 7. Download 2010 tax forms Example. Download 2010 tax forms On February 1, 2013, the XYZ corporation purchased and placed in service qualifying section 179 property that cost $500,000. Download 2010 tax forms It elects to expense the entire $500,000 cost under section 179. Download 2010 tax forms In June, the corporation gave a charitable contribution of $10,000. Download 2010 tax forms A corporation's limit on charitable contributions is figured after subtracting any section 179 deduction. Download 2010 tax forms The business income limit for the section 179 deduction is figured after subtracting any allowable charitable contributions. Download 2010 tax forms XYZ's taxable income figured without the section 179 deduction or the deduction for charitable contributions is $520,000. Download 2010 tax forms XYZ figures its section 179 deduction and its deduction for charitable contributions as follows. Download 2010 tax forms Step 1– Taxable income figured without either deduction is $520,000. Download 2010 tax forms Step 2– Using $520,000 as taxable income, XYZ's hypothetical section 179 deduction is $500,000. Download 2010 tax forms Step 3– $20,000 ($520,000 − $500,000). Download 2010 tax forms Step 4– Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. Download 2010 tax forms Step 5– $518,000 ($520,000 − $2,000). Download 2010 tax forms Step 6– Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 deduction. Download 2010 tax forms Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 deduction. Download 2010 tax forms Step 7– $20,000 ($520,000 − $500,000). Download 2010 tax forms Step 8– Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. Download 2010 tax forms Carryover of disallowed deduction. Download 2010 tax forms   You can carry over for an unlimited number of years the cost of any section 179 property you elected to expense but were unable to because of the business income limit. Download 2010 tax forms This disallowed deduction amount is shown on line 13 of Form 4562. Download 2010 tax forms You use the amount you carry over to determine your section 179 deduction in the next year. Download 2010 tax forms Enter that amount on line 10 of your Form 4562 for the next year. Download 2010 tax forms   If you place more than one property in service in a year, you can select the properties for which all or a part of the costs will be carried forward. Download 2010 tax forms Your selections must be shown in your books and records. Download 2010 tax forms For this purpose, treat section 179 costs allocated from a partnership or an S corporation as one item of section 179 property. Download 2010 tax forms If you do not make a selection, the total carryover will be allocated equally among the properties you elected to expense for the year. Download 2010 tax forms   If costs from more than one year are carried forward to a subsequent year in which only part of the total carryover can be deducted, you must deduct the costs being carried forward from the earliest year first. Download 2010 tax forms Special rules for qualified section 179 real property. Download 2010 tax forms   You can carry over to 2013 a 2012 deduction attributable to qualified section 179 real property that you elected to expense but were unable to take because of the business income limitation. Download 2010 tax forms Any such 2012 carryover amounts that are not deducted in 2013, plus any 2013 disallowed section 179 expense deductions attributable to qualified real property, are not carried over to 2014. Download 2010 tax forms Instead these amounts are treated as property placed in service on the first day of 2013 for purposes of computing depreciation (including the special depreciation allowance, if applicable). Download 2010 tax forms See section 179(f) of the Internal Revenue Code and Notice 2013-59 for more information. Download 2010 tax forms If there is a sale or other disposition of your property (including a transfer at death) before you can use the full amount of any outstanding carryover of your disallowed section 179 deduction, neither you nor the new owner can deduct any of the unused amount. Download 2010 tax forms Instead, you must add it back to the property's basis. Download 2010 tax forms Partnerships and Partners The section 179 deduction limits apply both to the partnership and to each partner. Download 2010 tax forms The partnership determines its section 179 deduction subject to the limits. Download 2010 tax forms It then allocates the deduction among its partners. Download 2010 tax forms Each partner adds the amount allocated from partnerships (shown on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Download 2010 tax forms ) to his or her nonpartnership section 179 costs and then applies the dollar limit to this total. Download 2010 tax forms To determine any reduction in the dollar limit for costs over $2,000,000, the partner does not include any of the cost of section 179 property placed in service by the partnership. Download 2010 tax forms After the dollar limit (reduced for any nonpartnership section 179 costs over $2,000,000) is applied, any remaining cost of the partnership and nonpartnership section 179 property is subject to the business income limit. Download 2010 tax forms Partnership's taxable income. Download 2010 tax forms   For purposes of the business income limit, figure the partnership's taxable income by adding together the net income and losses from all trades or businesses actively conducted by the partnership during the year. Download 2010 tax forms See the Instructions for Form 1065 for information on how to figure partnership net income (or loss). Download 2010 tax forms However, figure taxable income without regard to credits, tax-exempt income, the section 179 deduction, and guaranteed payments under section 707(c) of the Internal Revenue Code. Download 2010 tax forms Partner's share of partnership's taxable income. Download 2010 tax forms   For purposes of the business income limit, the taxable income of a partner engaged in the active conduct of one or more of a partnership's trades or businesses includes his or her allocable share of taxable income derived from the partnership's active conduct of any trade or business. Download 2010 tax forms Example. Download 2010 tax forms In 2013, Beech Partnership placed in service section 179 property with a total cost of $2,025,000. Download 2010 tax forms The partnership must reduce its dollar limit by $25,000 ($2,025,000 − $2,000,000). Download 2010 tax forms Its maximum section 179 deduction is $475,000 ($500,000 − $25,000), and it elects to expense that amount. Download 2010 tax forms The partnership's taxable income from the active conduct of all its trades or businesses for the year was $600,000, so it can deduct the full $475,000. Download 2010 tax forms It allocates $40,000 of its section 179 deduction and $50,000 of its taxable income to Dean, one of its partners. Download 2010 tax forms In addition to being a partner in Beech Partnership, Dean is also a partner in the Cedar Partnership, which allocated to him a $30,000 section 179 deduction and $35,000 of its taxable income from the active conduct of its business. Download 2010 tax forms He also conducts a business as a sole proprietor and, in 2013, placed in service in that business qualifying section 179 property costing $55,000. Download 2010 tax forms He had a net loss of $5,000 from that business for the year. Download 2010 tax forms Dean does not have to include section 179 partnership costs to figure any reduction in his dollar limit, so his total section 179 costs for the year are not more than $2,000,000 and his dollar limit is not reduced. Download 2010 tax forms His maximum section 179 deduction is $500,000. Download 2010 tax forms He elects to expense all of the $70,000 in section 179 deductions allocated from the partnerships ($40,000 from Beech Partnership plus $30,000 from Cedar Partnership), plus $55,000 of his sole proprietorship's section 179 costs, and notes that information in his books and records. Download 2010 tax forms However, his deduction is limited to his business taxable income of $80,000 ($50,000 from Beech Partnership, plus $35,000 from Cedar Partnership minus $5,000 loss from his sole proprietorship). Download 2010 tax forms He carries over $45,000 ($125,000 − $80,000) of the elected section 179 costs to 2014. Download 2010 tax forms He allocates the carryover amount to the cost of section 179 property placed in service in his sole proprietorship, and notes that allocation in his books and records. Download 2010 tax forms Different tax years. Download 2010 tax forms   For purposes of the business income limit, if the partner's tax year and that of the partnership differ, the partner's share of the partnership's taxable income for a tax year is generally the partner's distributive share for the partnership tax year that ends with or within the partner's tax year. Download 2010 tax forms Example. Download 2010 tax forms John and James Oak are equal partners in Oak Partnership. Download 2010 tax forms Oak Partnership uses a tax year ending January 31. Download 2010 tax forms John and James both use a tax year ending December 31. Download 2010 tax forms For its tax year ending January 31, 2013, Oak Partnership's taxable income from the active conduct of its business is $80,000, of which $70,000 was earned during 2012. Download 2010 tax forms John and James each include $40,000 (each partner's entire share) of partnership taxable income in computing their business income limit for the 2013 tax year. Download 2010 tax forms Adjustment of partner's basis in partnership. Download 2010 tax forms   A partner must reduce the basis of his or her partnership interest by the total amount of section 179 expenses allocated from the partnership even if the partner cannot currently deduct the total amount. Download 2010 tax forms If the partner disposes of his or her partnership interest, the partner's basis for determining gain or loss is increased by any outstanding carryover of disallowed section 179 expenses allocated from the partnership. Download 2010 tax forms Adjustment of partnership's basis in section 179 property. Download 2010 tax forms   The basis of a partnership's section 179 property must be reduced by the section 179 deduction elected by the partnership. Download 2010 tax forms This reduction of basis must be made even if a partner cannot deduct all or part of the section 179 deduction allocated to that partner by the partnership because of the limits. Download 2010 tax forms S Corporations Generally, the rules that apply to a partnership and its partners also apply to an S corporation and its shareholders. Download 2010 tax forms The deduction limits apply to an S corporation and to each shareholder. Download 2010 tax forms The S corporation allocates its deduction to the shareholders who then take their section 179 deduction subject to the limits. Download 2010 tax forms Figuring taxable income for an S corporation. Download 2010 tax forms   To figure taxable income (or loss) from the active conduct by an S corporation of any trade or business, you total the net income and losses from all trades or businesses actively conducted by the S corporation during the year. Download 2010 tax forms   To figure the net income (or loss) from a trade or business actively conducted by an S corporation, you take into account the items from that trade or business that are passed through to the shareholders and used in determining each shareholder's tax liability. Download 2010 tax forms However, you do not take into account any credits, tax-exempt income, the section 179 deduction, and deductions for compensation paid to shareholder-employees. Download 2010 tax forms For purposes of determining the total amount of S corporation items, treat deductions and losses as negative income. Download 2010 tax forms In figuring the taxable income of an S corporation, disregard any limits on the amount of an S corporation item that must be taken into account when figuring a shareholder's taxable income. Download 2010 tax forms Other Corporations A corporation's taxable income from its active conduct of any trade or business is its taxable income figured with the following changes. Download 2010 tax forms It is figured before deducting the section 179 deduction, any net operating loss deduction, and special deductions (as reported on the corporation's income tax return). Download 2010 tax forms It is adjusted for items of income or deduction included in the amount figured in 1, above, not derived from a trade or business actively conducted by the corporation during the tax year. Download 2010 tax forms How Do You Elect the Deduction? You elect to take the section 179 deduction by completing Part I of Form 4562. Download 2010 tax forms If you elect the deduction for listed property (described in chapter 5), complete Part V of Form 4562 before completing Part I. Download 2010 tax forms For property placed in service in 2013, file Form 4562 with either of the following. Download 2010 tax forms Your original 2013 tax return, whether or not you file it timely. Download 2010 tax forms An amended return for 2013 filed within the time prescribed by law. Download 2010 tax forms An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. Download 2010 tax forms The amended return must also include any resulting adjustments to taxable income. Download 2010 tax forms You must keep records that show the specific identification of each piece of qualifying section 179 property. Download 2010 tax forms These records must show how you acquired the property, the person you acquired it from, and when you placed it in service. Download 2010 tax forms Election for certain qualified section 179 real property. Download 2010 tax forms   You can elect to expense certain qualified real property that you placed in service as section 179 property for tax years beginning in 2013. Download 2010 tax forms If you elect to treat this property as section 179 property, you must elect the application of the special rules for qualified real property described in section 179(f) of the Internal Revenue Code. Download 2010 tax forms   To make the election, attach a statement indicating you are “electing the application of section 179(f) of the Internal Revenue Code” with either of the following. Download 2010 tax forms Your original 2013 tax return, whether or not you file it timely. Download 2010 tax forms An amended return for 2013 filed within the time prescribed by law. Download 2010 tax forms The amended return must also include any adjustments to taxable income. Download 2010 tax forms   The statement should indicate your election to expense certain qualified real property under section 179(f) on your return. Download 2010 tax forms It must specify one or more of the three types of qualified property (described under Qualified real property ) to which the election applies, the cost of each such type, and the portion of the cost of each such property to be taken into account. Download 2010 tax forms Also, report this on line 6 of Form 4562. Download 2010 tax forms    The maximum section 179 expense deduction that can be taken for qualified section 179 real property is limited to $250,000. Download 2010 tax forms Revoking an election. Download 2010 tax forms   An election (or any specification made in the election) to take a section 179 deduction for 2013 can be revoked without IRS approval by filing an amended return. Download 2010 tax forms The amended return must be filed within the time prescribed by law. Download 2010 tax forms The amended return must also include any resulting adjustments to taxable income. Download 2010 tax forms Once made, the revocation is irrevocable. Download 2010 tax forms When Must You Recapture the Deduction? You may have to recapture the section 179 deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. Download 2010 tax forms In the year the business use drops to 50% or less, you include the recapture amount as ordinary income in Part IV of Form 4797. Download 2010 tax forms You also increase the basis of the property by the recapture amount. Download 2010 tax forms Recovery periods for property are discussed under Which Recovery Period Applies in chapter 4 . Download 2010 tax forms If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. Download 2010 tax forms Instead, use the rules for recapturing depreciation explained in chapter 3 of Publication 544 under Section 1245 Property. Download 2010 tax forms For qualified real property (described earlier), see Notice 2013-59 for determining the portion of the gain that is attributable to section 1245 property upon the sale or other disposition of qualified real property. Download 2010 tax forms If the property is listed property (described in chapter 5 ), do not figure the recapture amount under the rules explained in this discussion when the percentage of business use drops to 50% or less. Download 2010 tax forms Instead, use the rules for recapturing excess depreciation in chapter 5 under What Is the Business-Use Requirement. Download 2010 tax forms Figuring the recapture amount. Download 2010 tax forms   To figure the amount to recapture, take the following steps. Download 2010 tax forms Figure the depreciation that would have been allowable on the section 179 deduction you claimed. Download 2010 tax forms Begin with the year you placed the property in service and include the year of recapture. Download 2010 tax forms Subtract the depreciation figured in (1) from the section 179 deduction you claimed. Download 2010 tax forms The result is the amount you must recapture. Download 2010 tax forms Example. Download 2010 tax forms In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. Download 2010 tax forms The property is not listed property. Download 2010 tax forms The property is 3-year property. Download 2010 tax forms He elected a $5,000 section 179 deduction for the property and also elected not to claim a special depreciation allowance. Download 2010 tax forms He used the property only for business in 2011 and 2012. Download 2010 tax forms In 2013, he used the property 40% for business and 60% for personal use. Download 2010 tax forms He figures his recapture amount as follows. Download 2010 tax forms Section 179 deduction claimed (2011) $5,000. Download 2010 tax forms 00 Minus: Allowable depreciation using Table A-1 (instead of section 179 deduction):   2011 $1,666. Download 2010 tax forms 50   2012 2,222. Download 2010 tax forms 50   2013 ($740. Download 2010 tax forms 50 × 40% (business)) 296. Download 2010 tax forms 20 4,185. Download 2010 tax forms 20 2013 — Recapture amount $ 814. Download 2010 tax forms 80 Paul must include $814. Download 2010 tax forms 80 in income for 2013. Download 2010 tax forms If any qualified zone property placed in service during the year ceases to be used in an empowerment zone by an enterprise zone business in a later year, the benefit of the increased section 179 deduction must be reported as other income on your return. Download 2010 tax forms Prev  Up  Next   Home   More Online Publications
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Understanding Your CP05 Notice

We’re reviewing your tax return to verify the following:

  • Your income
  • The withholding you reported on your income and social security benefits
  • The tax credits you claimed
  • The household help you claimed
  • Your business income

We’re holding your refund pending the results of our review.


What you need to do

You don’t need to take any action at this time. We may contact third parties to verify the information you reported on your return. If you haven’t received your refund or been contacted by us within 45 days from the date of this notice, you can call us at the number provided on your notice.


You may want to

  • Review this notice with your tax preparer.
  • If you are experiencing economic harm, believe an IRS system or procedure isn’t working as it should, or are seeking help in resolving tax problems that have not been resolved through normal channels, you may be eligible for Taxpayer Advocate Service (TAS) assistance. You can reach them at 1-877-777-4778 or TTY/TTD 1-800-829-4059.

Answers to Common Questions

Why was my return being reviewed?
While most returns are accepted as filed, some are selected for examination. The IRS examines some federal tax returns to determine if income, expenses, and credits are being reported accurately. The IRS selects returns for examination using various methods which include random sampling, computerized screening, and comparison of information received by the IRS such as Forms W-2 and 1099. Having your return selected for examination does not suggest that you made an error or were dishonest.

What if I did not file a tax return claiming the items you are questioning and someone else is using my name and social security number?
Send us a completed and signed Form 14039, Identity Theft Affidavit. You can download this form online at www.irs.gov. You can also refer to the IRS Identity Theft resource page for more information.


Tips for next year

Review all of your income and withholding documents for completeness and review your return to make sure you are eligible to claim all income, credits and business income that you reported.

Page Last Reviewed or Updated: 19-Feb-2014

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The Download 2010 Tax Forms

Download 2010 tax forms Index A Additional Medicare Tax, Reminders, Reporting sick pay on Form W-2. Download 2010 tax forms Agents, reporting, Agents Agricultural workers, H-2A agricultural workers. Download 2010 tax forms Alternative methods of withholding, 9. Download 2010 tax forms Alternative Methods for Figuring Withholding Annuity payments, 8. Download 2010 tax forms Pensions and Annuities Assistance (see Tax help) Awards, employee achievement, Employee Achievement Awards B Back pay, Back Pay Below-market rate loans, Interest-Free and Below-Market-Interest-Rate Loans C Comments on publication, Comments and suggestions. Download 2010 tax forms Common paymaster, Common Paymaster Common-law employees, Common-Law Employees Common-law rules, Common-Law Rules Corporate officers, Common-Law Employees D Deferred compensation plans, nonqualified, Nonqualified Deferred Compensation Plans Direct sellers, Direct sellers. Download 2010 tax forms Director of corporation, Common-Law Employees E Electronic Form W-2, Reminders Employee achievement awards, Employee Achievement Awards Employee or contractor Attorney, Attorney Automobile industry, Automobile Industry Building industry, Building and Construction Industry Computer industry, Computer Industry Salesperson, Salesperson Taxicab driver, Taxicab Driver Trucking industry, Trucking Industry Employee's taxes paid by employer, Employee's Portion of Taxes Paid by Employer Employees Common-law rules, Common-Law Rules Industry examples, Industry Examples Statutory, Statutory Employees Employees defined, 1. Download 2010 tax forms Who Are Employees? Employees misclassification, Misclassification of Employees Excessive termination payments (golden parachute), Golden Parachute Payments Exempt organizations, 3. Download 2010 tax forms Employees of Exempt Organizations F Fellowship payments, Scholarship and Fellowship Payments Form W-2, electronic filing, Reminders G Golden parachute, Golden Parachute Payments I Idle time, Withholding for Idle Time Independent contractors, Independent Contractors Indian gaming profits, 10. Download 2010 tax forms Tables for Withholding on Distributions of Indian Gaming Profits to Tribal Members Interest-free loans, Interest-Free and Below-Market-Interest-Rate Loans International social security agreements, International Social Security Agreements L Leased employees, Leased employees. Download 2010 tax forms Leave sharing plans, Leave Sharing Plans Loans, interest-free or below-market rate, Interest-Free and Below-Market-Interest-Rate Loans M Ministers, Ministers. Download 2010 tax forms Misclassification of employees, Misclassification of Employees N Nonqualified plans, Nonqualified Deferred Compensation Plans O Officer of corporation, Common-Law Employees Outplacement services, Outplacement Services P Pension payments, 8. Download 2010 tax forms Pensions and Annuities Publications (see Tax help) R Real estate agents, Licensed real estate agents. Download 2010 tax forms Religious exemptions, 4. Download 2010 tax forms Religious Exemptions and Special Rules for Ministers Reporting agents, Agents S Scholarship payments, Scholarship and Fellowship Payments Sick pay, 6. Download 2010 tax forms Sick Pay Reporting SIMPLE retirement plans, SIMPLE Retirement Plans Simplified employee pension, Contributions to a Simplified Employee Pension (SEP) Statutory employees, Statutory Employees Statutory nonemployees, Statutory Nonemployees Suggestions for publication, Comments and suggestions. Download 2010 tax forms Supplemental unemployment benefits, Supplemental Unemployment Benefits T Tax help, How To Get Tax Help Tax-exempt organizations, 3. Download 2010 tax forms Employees of Exempt Organizations Tax-sheltered annuities, Tax-Sheltered Annuities Technical service specialists, Technical service specialists. Download 2010 tax forms Third-party sick pay, Sick Pay Paid by Third Party , Third-party sick pay recap Forms W-2 and W-3. Download 2010 tax forms TTY/TDD information, How To Get Tax Help W Withholding Alternative methods, 9. Download 2010 tax forms Alternative Methods for Figuring Withholding Idle time payments, Withholding for Idle Time Indian gaming profits, 10. Download 2010 tax forms Tables for Withholding on Distributions of Indian Gaming Profits to Tribal Members Pensions and annuities, Federal Income Tax Withholding Sick pay, Income Tax Withholding on Sick Pay Prev  Up     Home   More Online Publications